JAMES FLANIGAN

Value Shifts from Hardware to Service

Did you notice that struggling AT&T, in announcing last week that it will reorganize into several separate companies, chose its business services division to be the new parent company? The business services division, with roughly $27 billion in annual sales, advises companies on how best to set up Internet communications networks.

AT&T is not alone in focusing on services. Hewlett-Packard, the Palo Alto-based maker of computers, computing servers, workstations, printers and imaging equipment, is negotiating to acquire the information technology consulting practice of PricewaterhouseCoopers for $18 billion. HP wants to expand dramatically in the information technology services field.

In that respect, HP is following IBM, which has transformed itself over the last seven years to become world leader in IT services. IBM now gets roughly $32 billion in annual sales--37% of total revenues--from helping companies streamline relations with customers, suppliers and employees through skilled use of the Internet.

It's not news, of course, that computer consulting and software services is a big business; taken all together, computing services is now a $500-billion global industry.

But the special branch of information technology consulting that consists of helping firms build and maintain e-commerce businesses on the Internet has developed rapidly in recent years. IT consulting alone will have worldwide revenues of $40 billion this year, more than half of it in the United States, estimates International Data Corp., a Framingham, Mass., research firm.

And growth will accelerate in the years ahead as today's computer-based Internet becomes a river of information flowing ceaselessly in broad networks of optical fiber connections.

Hewlett-Packard's proposed deal illustrates how much the business environment is changing. The IT consulting practice of PricewaterhouseCoopers, a leading accounting firm, is a partnership, not a corporation. At a proposed price of $18 billion, HP is offering the equivalent of $580,645 for each of the 31,000 PricewaterhouseCoopers consultants who will come to work for HP if the deal is concluded.

That's a risky proposition, because the PWC consultants can take jobs elsewhere at any time. As the saying goes, "The assets go down in the elevator every evening."

Yet the move makes sense, analysts say. HP's chief executive, Carleton Fiorina, realizes that the computers and printers that HP makes will become "commodities," says analyst Toni Sacconaghi of Sanford C. Bernstein Inc., the New York investment research firm.

Processing power of all computer hardware "will increase 1,000 times" in the next decade, Sacconaghi says. That means prices will continue to fall for computing power--the hardware of chips and motherboards. But premiums will rise for knowledge of ways to use the power, for "solutions" to information technology problems.

But just what is it that IT consultants do that earns them $90,000 to $100,000 each per year? They help set up systems to move goods and services from suppliers to customers "without paperwork and phone calls and other interruptions," says Tom Elliott, head of U.S. business services for Arthur Andersen Inc., the Chicago-based accounting and consulting firm.

That may not sound like much, but the payoff is dramatic. "A good system can lower the cost of filling a purchase order from about $75 to $10," Elliott says.

Savings like that are the stuff of economic revolution. But changes in electronic business are about to become even more dramatic with the spread of broadband networks that are "on all the time, allowing consumers to download information and order goods and services the way kids now download music. Napster is the new model for business," says Paul Saffo, director of Silicon Valley research group Institute for the Future.

What is envisioned by experts are networks in which programmed machines communicate with other machines on broadband networks to perform tasks for consumers and for business. Requirements and preferences of individuals and companies will be met automatically.

"It will be Napster on steroids," says Bharat Sastri, founder of HelloBrain.com, an online exchange for technological information based in Santa Clara, Calif. Ordering, delivery, billing and payments will be even faster than today's "Amazon.com" model of online consumer purchases, Sastri says.

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With technological change accelerating, it's not surprising that companies everywhere need counseling. What may be surprising is how fast leading companies have responded. IBM leads the field, with Electronic Data Systems--now independent of General Motors, which had acquired it from Ross Perot--second and Fujitsu Ltd., the Japanese computer giant, No. 3 in IT service revenue.

Hewlett-Packard now gets 10% of its $48.5 billion in annual revenue from services, a ration that will more than double to 21% of revenues if it completes the deal for PricewaterhouseCoopers consulting.